Tuvalu: Strengthened Fiscal Sustainability Program

Transcription

1 Completion Report Project Number: Grant Number: 0442 March 2017 Tuvalu: Strengthened Fiscal Sustainability Program This document is being disclosed to the public in accordance with ADB s Public Communications Policy 2011.

2 CURRENCY EQUIVALENTS Currency unit Australian dollar (A$) At Appraisal At Program Completion 26 August November 2016 A$1.00 = $ $ $1.00 = A$ A$ ABBREVIATIONS ADB Asian Development Bank CIF CPU Consolidated Investment Fund central procurement unit GDP gross domestic product MFED PERP PRM PWD TA TSF TTF TTFAC Ministry of Finance and Economic Development Public Enterprise Reform Plan policy reform matrix Public Works Department technical assistance Tuvalu Survival Fund Tuvalu Trust Fund Tuvalu Trust Fund Advisory Committee NOTE In this report, $ refers to US dollars unless otherwise stated. Vice-President S. Groff, Operations 2 Director General X. Yao, Pacific Department (PARD) Regional Director R. Jauncey, Pacific Subregional Office, PARD Team leader Team members S.B. Olsson, Country Coordination Officer, PARD C. Currie, Senior Country Economist, PARD C. Damandl, Senior Counsel, Office of the General Counsel M. Lototele, Senior Economics Officer, PARD L. Sovea, Senior Programs Assistant, PARD L. Tora, Country Economist, PARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 CONTENTS Page BASIC DATA I. PROGRAM DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1 A. Relevance of Design and Formulation 1 B. Program Outputs 2 C. Program Costs 6 D. Disbursements and Program Schedule 6 E. Implementation Arrangements 7 F. Conditions and Covenants 7 G. Performance of the Borrower and the Executing Agency 7 H. Performance of the Asian Development Bank 8 III. EVALUATION OF PERFORMANCE 8 A. Relevance 8 B. Effectiveness in Achieving Outcomes 8 C. Efficiency in Achieving Outcome and Outputs 9 D. Preliminary Assessment of Sustainability 9 E. Institutional Development 9 F. Impact 9 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 10 A. Overall Assessment 10 B. Lessons 10 C. Recommendations 11 i APPENDIXES 1. Design and Monitoring Framework Policy Reform Matrix Phase Status of Compliance with Grant Covenants 19

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5 BASIC DATA A. Grant Identification 1. Country 2. Grant Number 3. Program Title 4. Borrower 5. Executing Agency 6. Amount of Grant 7. Program Completion Report Number B. Grant Data 1. Fact Finding Date started Date completed 2. Grant Negotiations Date started Date completed 3. Date of Board Approval 4. Date of Grant Agreement 5. Date of Grant Effectiveness In grant agreement Actual Number of extensions 6. Closing Date In grant agreement Actual Number of extensions Tuvalu 0442 Strengthened Fiscal Sustainability Program Government of Tuvalu Ministry of Finance and Economic Development $2,000, June June August August September October January October October November Disbursements a. Dates Initial Disbursement 28 October 2015 Effective Date 19 October 2015 Final Disbursement 28 October 2015 Original Closing Date 30 October 2015 Time Interval 0 Time Interval 11 days b. Amount ($ million) Category or Subloan Original Allocation Last Revised Allocation Amount Canceled Net Amount Available Amount Disbursed Undisbursed Balance Program Total

6 ii C. Program Data 1. Program Cost ($ million) Cost Appraisal Estimate Actual Foreign exchange cost Local currency cost Total Financing Plan ($ million) Cost Appraisal Estimate Actual Implementation costs Borrower financed ADB financed Other external financing Total IDC costs Borrower financed ADB financed Other external financing Total ADB = Asian Development Bank, IDC = interest during construction. 3. Program Performance Report Ratings Ratings Implementation Period Development Objectives Implementation Progress From 1 August 2014 to 30 October 2015 Satisfactory Satisfactory D. Data on Asian Development Bank Missions Name of Mission Date No. of Persons No. of Person-Days Specialization of Members Fact-finding Program completion review June November a, b, c b a = counsel, b = economist, c = project officer.

7 I. PROGRAM DESCRIPTION 1. At the request of the Government of Tuvalu, the Board of Directors of the Asian Development Bank (ADB) approved a grant of $2.00 million from ADB s Special Funds for the Strengthened Fiscal Sustainability Program in September The program was designed to achieve a stronger fiscal position for Tuvalu by providing financial resources to implement selected reforms under the third and final phase of the government s current multiyear policy reform matrix (PRM) aimed at reducing revenue and budget volatility whilst maintaining the provision of essential services for poverty alleviation. 2. Parallel, collaborative grant cofinancing was provided by the World Bank ($1.5 million), the Government of Australia ($1.1 million) and the Government of New Zealand ($0.4 million) upon completion of their selected reforms under phase 3 of the PRM. Reforms already achieved under phases 1 and 2 triggered around $8.0 million in budget support from ADB and these partners The intended impacts of the program were good governance, macroeconomic growth, and fiscal stability improvement, while the intended outcome was for Tuvalu s fiscal position to be strengthened. The program had three outputs: (i) public procurement strengthened, (ii) commercial orientation for public enterprises and private sector development strengthened, and (iii) sustainability of the fiscal buffer strengthened. 3 II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 4. The program design was relevant at appraisal and remained relevant at the time of program completion. The program was formulated through extensive discussions with the government and development partners (Governments of Australia and New Zealand, and the World Bank) and delivered through the PRM with parallel, collaborative grant cofinancing from the other development partners. The PRM helped the government initiate the reforms required to achieve stronger fiscal sustainability. 5. The program was fully aligned with ADB's Pacific Approach, and Interim Pacific Approach 2015; the government s Te Kakeega II ; and ADB s country operations business plan, for Tuvalu The program builds on lessons from previous ADB programs in Tuvalu and elsewhere in the Pacific, which highlight the importance of (i) maintaining a single, government-led policy matrix to enhance coordination and collaboration between development partners; (ii) using a single-tranche modality within a programmatic, multiyear approach supported by several partners; (iii) implementing fewer reforms but with a large potential impact; and (iv) linking capacity building technical assistance (TA) support to PRM implementation, since capacity 1 ADB Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Grant Tuvalu: Strengthened Fiscal Sustainability Program. Manila. 2 A review of all three phases of the PRM and all donor policy action requirements was undertaken for the Australian Department of Foreign Affairs and Trade (DFAT) in June (DFAT Tuvalu Review of the Multi-Donor Policy Reform Program. Economic Development Services Pty Ltd. Australia.) 3 The design and monitoring framework is in Appendix 1. 4 ADB Pacific Approach, Manila; ADB Interim Pacific Approach, Manila; Government of Tuvalu Te Kakeega II National Strategy for Sustainable Development, Funafuti; ADB Tuvalu Country Operations Business Plan, Manila (accessible from the list of linked documents in Appendix 2).

8 2 constraints can hamper the government's ability to follow through on agreed reforms. 5 The program is a stand-alone policy-based grant operation that will focus on the implementation of the final phase of the current PRM. ADB s engagement beyond the PRM will be sustained through ongoing policy dialogue, a policy-based operation planned for 2018, and follow-up TA to improve public sector management and support greater investments in economic infrastructure. 7. The program was cautiously optimistic in its assumptions of the capacity of government agencies (especially the newly created agencies) to implement and sustain certain elements of the reform program. However, the downside risks of capacity falling short of expectations were recognized during the design phase. No specific TA was provided for the program design or implementation, instead, adequate support for the implementation of the program was available through ongoing capacity development TA. 6 This helped the government achieve the desired outcome of a stronger fiscal position. (footnote 6). B. Program Outputs 8. To achieve fiscal sustainability, the program aimed to deliver three outputs (paras. 9 26). The measures of output achievements are based on the performance indicators in the design and monitoring framework (Appendix 1). 1. Output 1: Public Procurement Strengthened 9. The policy actions under output 1 were fully achieved, but the benefits of the reforms have yet to be fully realized. Under the policy pre-conditions for grant release, the cabinet was to approve an annual procurement report for 2014 (output 1.1), and a government procurement website was to be developed and launched as a central resource for all public-procurement related information (output 1.2). These policy actions constituted the final phase of ADBsupported public procurement reforms begun in 2012, which led to the adoption of the 2012 National Procurement Policy, the Public Procurement Act 2013, the Public Procurement Regulations 2014, and the establishment of a central procurement unit (CPU) in Output 1.1. Under the Public Procurement Regulations, the CPU is obliged to present an annual report to the Finance Minister regarding the overall functioning of the public procurement system, including recommendations on measures to be taken to revise and improve procurement approval methods and other measures to enhance the quality of procurement work. 7 The report is expected to combine the results of minor procurement (transactions valued at A$5,000 and below, carried out by line ministry procurement officers) and major procurement (transactions above A$5,000, which are carried out by the CPU). The first annual report of the CPU reporting on its operations during 2014 was endorsed by the Finance Minister, approved by the cabinet, and published in August The annual report details procurement transactions undertaken by the CPU on behalf of the government in 2014, key achievements and challenges faced during 2014, and outstanding actions that require further attention. The inclusion of a 2015 work plan pursued these pending activities and enabled timely action on individual procurement transactions to avoid bunching at the end of the year. 11. Subsequent annual reporting and work plans are being produced, although with some 5 ADB Tuvalu: Improved Financial Management Program Completion Report. Manila; ADB Tuvalu: Strengthened Public Financial Management Program Completion Report. Manila. 6 ADB Technical Assistance to Tuvalu for Institutional Strengthening of the Ministry of Finance and Economic Development. Manila. 7 Government of Tuvalu Public Procurement Regulations (Clause 7.3 (i)). Funafuti. 8 Government of Tuvalu Central Procurement Unit (CPU) Report on Activities in Funafuti.

9 3 delays. The 2015 annual report was approved by the Finance Minister in January The delay in its completion was initially the result of capacity constraints within the CPU, which made it difficult to cope with a large increase in the workload associated with keeping the contract register up to date. The number of staff has since increased to five following the recruitment of two staff in June 2016 and technical skills training is being provided through the Chartered Institute of Procurement and Supply funded by the ongoing capacity development TA (footnote 6). Delays were also incurred because of difficulties in reconciling the CPU s own records with the end-of-year accounts of the Treasury Department. This led to the CPU being criticized for delays in processing procurement transactions, the majority of which could have been validated quickly if the contract register were kept up to date. Improved forward planning by the ministries and departments themselves to initiate their procurement transactions in good time would also minimize delays. The 2016 annual report is under development and will be approved by June ADB s ongoing capacity development TA (footnote 6) continues to support the CPU to achieve this output. 12. Output 1.2. The CPU s website, which serves as a centralized resource for all public procurement-related information, was developed and launched in The website is a good central source for all procurement-related information. This has enhanced the government s ability to obtain better value for money and use scarce public resources more efficiently. It serves as a tool to (i) increase the government s accountability of its use of public funds, (ii) step up the fight against corruption, and (iii) increase transparency and legal certainty. The website is maintained by CPU staff, two of whom have been trained, and all new procurement opportunities are uploaded when the CPU is ready to call for bids. It does not yet have a hit counter to measure usage, and the lack of a download facility requires interested companies to contact the CPU by to be sent an e-copy of the bidding documents. The website was down for several weeks from around May 2016 because of an oversight in paying the annual hosting fee. This has since been rectified. 13. Information on procurement is also supplemented through Tuvalu benefiting from an ongoing ADB e-procurement initiative that provides the CPU with access to advertise on the website of In-tend Ltd at and allowing bidders to download documents and upload their bids, as well as receiving seminar and webinar training to become progressively proficient in all stages of e-procurement. 10 Tuvalu managed to publish its first tender on the In-tend system in September Extending the use of In-tend after 2 years will be at Tuvalu s expense. The CPU will evaluate the benefits of continuing to use In-tend before the project implementation period ends in October The CPU website and current use of In-tend have helped widen the interest of overseas suppliers, including those from Australia and New Zealand, and generated more competition among bidders. 11 Prior to the website s establishment, advertising of contracts was limited to local radio and Fiji newspapers. While no quantitative measure of the number of visits to the website have been recorded as yet, responses to listings on the website indicate greater interest in the government s procurement requirements. 2. Output 2: Commercial Orientation for Public Enterprises and Private Sector Development Strengthened 9 At 10 ADB Regional Technical Assistance to Asia Pacific for Public Electronic Procurement Network. Manila. Intend won a 2-year contract financed by an ADB grant to promote and train users seeking to progress to full e- procurement. 11 One UK-based company, manufacturing small agricultural and construction machinery, has won two contracts in Tuvalu in the last 18 months, despite the distance.

10 4 15. All policy actions under output 2 were achieved, with the caveat that the implementation of output 2.3 was slow. The policy pre-conditions for grant release were: cabinet approval of the Public Enterprise Reform Plan (PERP) (output 2.1); cabinet approval of the concession sale of the Vaiaku Lagi Hotel (VLH), hotel land surveyed, and sale and tender documents prepared (output 2.2); and cabinet approval of the Public Works Department (PWD) rationalization strategy to promote the contracting out of capital works to the private sector (output 2.3). 16. Output 2.1. PERP was developed and adopted by the cabinet in Its objective was to guide government decision-making toward enhancing the commercial orientation and financial soundness of public enterprises, and to clearly define and cost their social responsibilities. The plan, along with strengthened accounting and auditing practices, aimed to boost the transparency and accountability of public enterprises and encourage greater private sector participation. 17. PERP has increased the commercial orientation of public enterprises. The crossliabilities of unpaid bills to public enterprises by the government and unpaid taxes to the government by public enterprises have been eliminated, and this has helped the operational management of public enterprises. Public enterprises continue to fund some social responsibilities, which affects their financial performance, so the need arises for these to be more clearly defined and funded directly by government via community service obligations. It is also the case that more needs to be done to strengthen the monitoring and reporting of the performance of public enterprises, but this will require more staff for the public enterprise reform management unit, which is a medium-term objective. In view of that, the capacity building TA (footnote 6) was extended by 12 months to further assist the government's central procurement unit and the public enterprises in capacity building and reform. 18. Output 2.2. A key achievement of the program was the successful sale of the Vaiaku Lagi Hotel in 2016, which was underpinned by TA support (footnote 6). Previous efforts by the government to sell the hotel had been unsuccessful for lack of private sector interest (partly because of a ban on transferring the sublease of the land to an international investor). However, in 2015, the cabinet approved the sale of the hotel concession to the Tuvalu National Provident Fund, which will operate the hotel under a new subsidiary. The sale was completed on 30 November 2016 and the hotel was renamed Funafuti Lagoon Hotel. The new owner intends to increase the number of rooms and expand and improve the range of facilities available to guests. The government is expected to benefit from the concession sale through improved financial returns but does not bear the risks associated with the new investment. Also, to the extent that the new operator can increase international guest occupancy, benefits will accrue to the broader economy Output 2.3. The grant release requirement was for cabinet to approve a rationalization strategy for the PWD to promote the contracting out of capital works to the private sector. 13 This was to help build local private sector capacity to undertake capital works in Tuvalu, including the purchase of required building materials. The intention was for the PWD to limit its role to being the government s designer of civil works and supervisor of their construction by private sector contractors. It was accepted that this would eventually lead to a reduction in the number of construction staff employed by the PWD. However, it was considered likely that these people would find work in the private sector, even with successful international bidders for construction works. To ensure employment opportunities for the local workforce, subsequent bids were 12 The bid involved an initial payment and an annual fee based on a percentage of revenue. The concession owner is obliged to refurbish the hotel and will work with the government to encourage tourism. 13 The relevant cabinet minutes (MO32/15) endorsed the initiative to "tender, where appropriate, major" infrastructure projects to the private sector. This suggests that the cabinet minutes do not fully reflect the intent of the proposed PWD rationalization strategy.

11 5 required to state the number of local staff likely to be hired as part of the contract and this was to be a factor in bid evaluation. 20. It was acknowledged from the outset that implementing the PWD rationalization strategy would take time. While the objective is for the PWD to withdraw totally from undertaking construction in accordance with government policy and focus on construction supervision, it is recognized that a phased approach to this is necessary. Such an approach is recommended in a report prepared by an advisor to the PWD under the capacity development TA (footnote 6), which proposes various transitory steps: (i) a clear restatement of the intended roles and responsibilities of the PWD; (ii) restructuring of the units within the PWD to focus on these roles and responsibilities; (iii) appropriate retraining and bonding of staff; (iv) training and support for small private sector start-up businesses; (v) selection of only some trades to be privatized initially; and (vi) for new private sector start-up contractors, provision of technical and financial training, guaranteed workload for a number of years, and tools and materials in initial years. 21. While progress is being made in rationalizing the PWD, constraints remain: (i) the high cost of international bidders; (ii) local bidders limited financial capability to meet working capital requirements to finance the pre-purchase of building materials; (iii) the limited skills base and equipment of Tuvalu s private sector contractors; (iv) PWD s view that bids from local private sector contractors are more expensive than the cost of doing the work itself; (v) the government occasionally requesting certain construction projects to be undertaken urgently and the PWD s view that contracting out in such circumstances is too time-consuming; (vi) the lack of technical capacity within PWD to supervise its construction projects; and (vii) increased government spending on capital works in recent years. 22. ADB s TA (footnote 6) supports the PWD rationalization process. It is making some headway with a summary of Pacific Island building codes, a review of the draft Tuvalu Building Act, and a review of all of PWD s technical specifications. The TA will also help merge the tendering documents used by the CPU and the PWD to ensure consistency between the two documents. 3. Output 3: Sustainability of the Fiscal Buffer Strengthened 23. The policy action under output 3 was fully achieved. The policy pre-condition for the release of the grant was that the cabinet endorse the revised financial instructions under the Public Finance Act (output 3.1). 24. Recognizing that much of the improvement in the fiscal balance during came, thanks to temporary cyclical factors (especially higher fishing license fees) and nonrecurrent revenue, the government sought to improve the way it operates its Consolidated Investment Fund (CIF) to better insulate the budget and the economy from external shocks. 25. Output 3.1. The cabinet endorsed changes to the financial instructions under the Public Finance Act to include detailed rules to guide, replenish, and regulate the use of the CIF, ensuring that the target CIF savings balance will be at least 16% of the maintained value of the Tuvalu Trust Fund (TTF) and regulated through a CIF contributions and savings plan. 14 This reform was to help transform the CIF into a fiscal stabilization fund that follows a clear rule of accumulation and withdrawal, whereby increases in returns from external revenue sources are saved and can be drawn down when revenues fall short because of a decrease in returns from external sources e.g., lower returns in world financial markets reducing or eliminating 14 Government of Tuvalu Tuvalu Government Financial Instructions Made Under Section 5 of the Public Finance Act (Chapter 14). Funafuti.

12 6 distributions from the TTF to the CIF for a period of time. During the national budget process, where the CIF balance at the start of the following budget year is forecast to be at a level below the target CIF saving balance, the finance minister will now be required to present to Parliament a CIF contributions and savings plan as a component of the national budget. 26. The revised rules governing the replenishment and regulation of the CIF have been in operation since the start of In 2015, the government achieved a fiscal surplus of A$4.6 million while at the same time achieving an A$3.0 million replenishment of the TTF. For 2016, the latest (November 2016) estimate is for a fiscal deficit of A$6.8 million, which the government will fund with a withdrawal from the CIF. 15 However, the CIF at the end of 2016, after funding the deficit, is estimated to be A$28.9 million, still above its minimum target value of 16% of the TTF maintained value (A$24.2 million). 16 During 2016, the government was to invest A$5.0 million in the newly established Tuvalu Survival Fund (TSF), which is to be available for financing responses to natural disasters such as cyclones. In addition, the 2016 budget stated that the government would reinvest A$4.78 million back into the TTF with the goal of growing its maintained value to A$200 million by Without these two commitments, the 2016 overall fiscal balance would be in surplus by around A$3.0 million, and the CIF would be higher. Current estimates expect overall budget deficits of A$2.2 million in 2017, A$6.8 million in 2018, and A$6.5 million in However, again this is after significant allocations to the TSF (between A$2.0 and A$2.1 million per annum) and the TTF (between A$5.0 and A$5.1 million per annum), implying forecast overall balance surpluses without these commitments. C. Program Costs 27. ADB provided support under the program by way of a grant of $2.0 million from ADB s Special Funds resources. The governments of Australia and New Zealand, and the World Bank provided collaborative grant cofinancing upon completion of their selected reforms under the third phase of the PRM. The World Bank ($1.5 million) approved its second grant under the PRM policy actions on 15 June 2015, 18 while the governments of Australia ($1.1 million) and New Zealand ($0.4 million) agreed to the release of their grants in June 2016 following the completion of the relevant policy actions in May The funds released under phase 3 of the PRM totaled $5.0 million. 28. The grant size was determined after consideration of the government s financing requirements and the costs of its reform program. At appraisal, projections for the budget financing requirements (post-cyclone Pam) indicated a fiscal deficit of 7.7% of gross domestic product (GDP) in 2015, and of 9.5% in In the event, an overall fiscal surplus of 10.5% of GDP was achieved in 2015, while an overall fiscal deficit of 14.2% of GDP is forecast for 2016, but as mentioned earlier, this includes significant provisions for growing the TTF and TSF, without which the overall balance would be in surplus. D. Disbursements and Program Schedule 29. The appraisal disbursement schedule (a single disbursement of the $2.0 million grant 19 ) 15 Data provided by the Ministry of Finance and Economic Development during the program completion review mission. 16 At the end of 2016, the CIF is estimated to have a value of $28.9 million and the TTF a value of $151 million. At the end of 2017, the CIF is estimated to be $26.2 million and the TTF $155 million: International Monetary Fund Tuvalu Staff Report for the 2016 Article IV Consultation. Washington, DC (27 August). 17 The TTF funds available for distribution as at 30 September 2016 were A$6.73 million. Of this it is proposed to reinvest A$5.0 million in the TTF while the remaining A$1.73 million will be taken as a distribution and used to help finance the proposed A$2.0 million investment in the TSF. 18 The government of Tuvalu received the funds, equivalent to A$2,015,023.17, on 19 August Equivalent to A$2,683, at the time of transfer.

13 7 was realistic, given the relatively small size of the grant. The grant proceeds were disbursed to the government of Tuvalu as set out in the grant agreement and according to ADB s simplified disbursement procedures and related requirements for program grants. 20 The grant proceeds were released on 28 October 2015, 19 days after the signing of the grant agreement. No corrective actions were taken by the borrower or ADB. E. Implementation Arrangements 30. No major changes were made to the implementation arrangements, which were adequate as designed to deliver program outputs and to achieve the program purpose. The Ministry of Finance and Economic Development (MFED) was the executing agency responsible for the policy actions required prior to the release of the grant proceeds. It was also responsible for program administration, disbursements, and for maintaining records. 31. The MFED, through the CPU, was the implementing agency for outputs 1.1 and 1.2. The MFED acted as the joint implementing agency (i) with the Public Enterprise Reform and Monitoring Unit in MFED for output 2.1; (ii) with the Ministry of Foreign Affairs, Environment, Trade, Labor and Tourism for output 2.2; and (iii) with the Ministry of Public Utilities for output 2.3. The MFED was the sole implementing agency for output 3. Ongoing TA (footnote 6) helped the government fulfill program conditions. ADB and its cofinancing development partners for the PRM process agreed to a high-level coordination and monitoring mechanism comprising members of the TTF Advisory Committee (TTFAC) representatives of the governments of Tuvalu, Australia, and New Zealand to monitor the implementation progress of the PRM. F. Conditions and Covenants 32. The covenants under the grant agreement were complied with. The policy actions for the release of the grant proceeds contained in the PRM Phase 3 made up the grant effectiveness conditions and covenant requirements of the grant agreement, and these were complied with prior to the release of funds in October No covenants were modified, suspended, or waived during the program period. The program used ADB s policy-based program modality and was based on the development policy letter and policy matrix for the grant. Program activities were confined to policy and institutional reforms, and none of the activities led to involuntary resettlement or affected indigenous people. Safeguard categories for environment, involuntary resettlement, and indigenous peoples are all C. G. Performance of the Borrower and the Executing Agency 33. The performance of the borrower and the executing agency is rated satisfactory. The borrower met the conditions for the release of grant proceeds and subsequently continued to implement various policy initiatives consistent with the program. The MFED as the executing agency implemented or oversaw the implementation of the policy actions required prior to the release of grant proceeds. The government has implemented, and continues to implement, several measures to improve fiscal stability, the procurement of goods and services, and the performance of public enterprises. It is also mindful of the need to assist the development of Tuvalu s private sector. The CIF value has been restored to a healthy level to provide a buffer against future economic shocks. Improvements were made in the procedures and processes for the procurement of the government s major expenditure items. A sale of the concession to operate the Vaiaku Lagi Hotel was completed in November However, only limited progress was made in reorienting the focus of the PWD. 20 ADB Simplification of Disbursement Procedures and Related Requirements for Program Loans. Manila.

14 8 H. Performance of the Asian Development Bank 34. ADB staff at headquarters and the Pacific Subregional Office in Suva assisted the government in designing and implementing the program. ADB staff actively monitored the program s progress and completion of policy actions required for the release of grant proceeds. Subsequently, ADB continued to monitor progress of the program through its dialogue with partner donors, its involvement with the government in formulating ADB s country operations business plan for Tuvalu (footnote 4), through discussions with the TTFAC and review of its biannual reports, and through regular reporting by ADB s TA consultants. The performance of ADB in program implementation is rated satisfactory. A. Relevance III. EVALUATION OF PERFORMANCE 35. The program was rated relevant. It laid the basis for sustainable fiscal balances to protect the economy against external shocks. The program completed the reform agenda begun with ADB support in The program fully aligned with the government s Te Kakeega II and Te Kakeega III , ADB s country operations business plans for and , and the PRM agreed in 2012 between the government and its donor partners ADB, World Bank, and the Australian and New Zealand governments. 36. During , Tuvalu experienced a significant improvement in the government s revenue base from a largely unanticipated increase in fees from issuing fishing licenses. While this presented challenges for budgeting and expenditure quality and control, the program s focus on stronger public procurement, greater commercial orientation of public enterprises, stronger private sector development, and a stronger fiscal buffer for better fiscal sustainability ensured that the overriding objectives of the government and ADB to achieve improved fiscal sustainability were achieved. This goal will continue to be a priority for Tuvalu s future economic and social well-being. B. Effectiveness in Achieving Outcomes 37. The $2 million program and grants from other donor partners enabled the government to achieve an overall surplus of A$4.6 million in 2015 enabling a further improvement in the balance of the CIF. At the same time, the government was able to increase recurrent and nonrecurrent spending and invest A$3.0 million back into the TTF, although this was possible to a large extent because of increases in government revenues in particular fishing license revenues. Projected overall balance deficits for 2017 (A$2.2 million), 2018 (A$6.6 million) and 2019 (A$6.2 million) is expected to be financed through sustainable drawdowns from the CIF. 21 A pipeline of budget support operations by development partners including ADB towards a fourth phase of the PRM will help support public service delivery while at the same time continuing to improve Tuvalu s long term fiscal position. 38. The grant release conditions were effective in encouraging the government to implement several specific procurement, public enterprise, and fiscal management reforms sooner than might have occurred without the incentives created by the grant conditions. These, along with the ongoing TA for the institutional strengthening of the MFED, made the program effective in contributing to the overall impacts sought good governance, macroeconomic growth, and improved fiscal stability Government of Tuvalu National Budget. Funafuti International Monetary Fund. Tuvalu Staff Report for the 2016 Article IV Consultation. Washington, DC

15 9 39. The program is assessed as having been effective in achieving its targeted outcome (fiscal position strengthened) and outputs (public procurement strengthened, commercial orientation for public enterprises and private sector development strengthened, and sustainability of the fiscal buffer strengthened). C. Efficiency in Achieving Outcome and Outputs 40. The program is rated efficient. It achieved the intended outcome of strengthening the fiscal position. The outputs as set out in the design and monitoring framework were achieved, although the implementation of some subsets particularly 1.1: procurement annual report approved by cabinet, and 2.3: PWD reorientation to develop a private sector construction industry was slow, mainly because of capacity constraints in government agencies. The program s design identified this as a potential risk, and ongoing TA (footnote 6) was provided to support the implementation of the reforms. As regards process efficiency, the grant release conditions were sufficiently realistic so that the government was able to meet them by 31 July D. Preliminary Assessment of Sustainability 41. Program sustainability is assessed as likely, given the commitment of the government to ongoing improvements in procurement, governance and operating performance of public enterprises, as well as fiscal sustainability. The rationalization of the PWD is expected to contribute to the development of the private sector, although the sustainability of the steps already taken under the PRM hinges on ongoing TA assistance from ADB and other development partners to support their implementation and improvements in performance. The TA support (footnote 6) will need to be ongoing for the future sustainability of improvements achieved thus far. The appointment by ADB of a full time development coordination officer in Tuvalu will also act to provide additional capacity to the government and support program sustainability. E. Institutional Development 42. The program reinforced improvements already made with respect to public procurement, public enterprise governance and operation, and fiscal stability. The program also provided more opportunities for Tuvalu s private sector, although progress in this regard was limited in the given time. F. Impact 43. The program s design and monitoring framework (Appendix 1) set several performance targets and indicators. First, the CIF minimum target balance was to be at least 16% of the TTF over This appears likely to have been achieved in 2016, and current forecasts suggest that the position will be maintained at least in 2017 and 2018 on the basis of government forecasts. Indeed, the government has set itself additional targets of growing the TTF to A$200 million real maintained value by 2020 and establishing the TSF. These commitments will make it more difficult initially to maintain the CIF but in the longer term should add to fiscal stability in that (i) the TTF will be in a position to make larger contributions to the CIF; and (ii) the TSF will be available to fund responses to adverse climatic events, reducing the need to draw down the CIF. 44. Second, the procurement annual report for 2014 was to be developed by the CPU and approved by the cabinet. This was achieved prior to grant release. However, delays occurred in

16 10 the completion and approval of the 2015 report, which are being rectified through ADB TA (footnote 6). 45. Third, the government procurement website was to be developed and launched. This was completed prior to the grant s release and reinforces other steps that were taken to widen international interest in Tuvalu s procurement requirements. 46. Fourth, the cabinet was to approve PERP. This was completed prior to the grant s release. 47. Fifth, cabinet was to approve the concession sale of the Vaiaku Lagi Hotel, the hotel land was to be surveyed, and the sale and tender documents were to be prepared. This was completed prior to the grant s release, and the concession to a subsidiary of the National Provident Fund was sold in late November Sixth, cabinet was to approve the PWD rationalization strategy to promote the contracting out of capital works to the private sector. This approval was obtained prior to the release of grant proceeds. However, the implementation of the strategy was incremental and leaves much to be done. 49. Seventh, the revised financial instructions under the Public Finance Act were to be endorsed by the cabinet. This was achieved prior to the release of grant proceeds. Thus far, the new instructions have been adhered to. A. Overall Assessment IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 50. The program was implemented as planned, providing immediate fiscal support to the government and incentives to undertake necessary policy actions consistent with the PFM. It was fully aligned with the government s economic reform program and ADB s country strategy. The grant program modality was straightforward and efficiently implemented. The program was relevant at the time of appraisal, continued to be during program implementation, and remains so. It was effective in achieving its intended outputs of strengthening public procurement, the commercial orientation of public enterprises, private sector development (albeit slowly), and fiscal stability. These improvements are likely to be sustainable although it is acknowledged that they will require ongoing TA (footnote 6) to augment the MFED s capabilities and to further strengthen its capacity development. The program is assessed as successful overall. B. Lessons 51. The conditions for the release of grant proceeds provided a useful incentive mechanism for the Government of Tuvalu to advance various reforms (para. 53). Although the program did not include specific TA for its design or implementation, support from ADB s ongoing capacity development TA (footnote 6), which includes institutional strengthening of the MEFD, has been vital to the effectiveness of the program in achieving its objectives. The TA was timely in that it both preceded the grant release and continued after the grant release, adding to the sustainability of the reform process. Similar TA is likely to be required if additional policy actions under the PFM are formulated. It will also assist in making further progress with respect to strengthening public procurement and reorientating and restructuring the PWD. 52. The program grant was a useful modality in that it directly (together with other donors) provided fiscal budget relief, which contributed to the replenishment of the CIF in 2015, as well

17 11 as providing leverage to expedite reforms. Benefits arose from the adoption of a multiyear approach and from donor partners being able to combine their respective interests in a single reform matrix. 23 C. Recommendations 53. Future monitoring. The fiscal and economic performance of Tuvalu, as of all Pacific developing member countries, is well monitored by ADB staff with highlights presented in the Pacific Economic Monitor and the Asian Development Outlook. 24 ADB, as part of the economic management group, also obtains regular updates on the existing and projected fiscal and economic performance of the Tuvalu economy, which is well documented in the budget documents and other MFED publications. The biannual TTFAC reports and the annual Article IV Consultation and Staff report by the International Monetary Fund also provide regular independent reporting on the current and projected future fiscal and economic performance. No further monitoring is required. 54. Covenants. All particular covenants specified as reform actions and measures in the policy matrix were completed and do not need to be further monitored. 55. Further action or follow-up. Ongoing public financial management reforms will further improve the efficiency and effectiveness of the MFED and other agencies responsible for public procurement, public enterprise performance, the development of the private sector, and fiscal stability. The consultants under ADB s capacity development TA (footnote 6) and ADB s participation in dialogue with the government and other donor partners will provide sufficient opportunity to identify any future additional forms of assistance that ADB could provide, and this assistance within the framework of the PRM and in coordination with other donor partners remains appropriate. On 2 June 2016, ADB approved cofinancing of $217,000 (A$300,000) from the Government of Australia for its capacity development TA, to specifically operationalize the procurement policy and regulations and to ensure that systematic procurement processes are understood, practiced across government, and reported annually. 56. Additional assistance. Future grant assistance under a phase 4 of the PRM should align with the government s objectives as set out in Te Kakeega III ( ), be in conjunction with complementary TA, coordinate and combine the interests of several donor partners and again utilize the TTFAC for monitoring and verifying policy actions, having regard to the need to resource the TTFAC for this role, which is not part of its core responsibilities. 57. Timing of the program performance evaluation report. While the program is substantially completed, if ongoing related assistance within the framework of the PRM is contemplated, it is likely to be more efficient to prepare the performance evaluation once any future stage(s) is completed. 23 Government of Australia Tuvalu Review of the Multi-Donor Policy Reform Program. Suva. 24 Available at: and

18 12 Appendix 1 Impacts the Program is Aligned with: DESIGN AND MONITORING FRAMEWORK Good governance, macroeconomic growth, and fiscal stability improved (National Strategy for Sustainable Development, a ) Program Results Chain Outcome Fiscal position strengthened Performance Indicators with Targets and Baselines The CIF minimum target balance is at least 16% of the TTF s real maintained value during ( baseline: average balance of 6.8%) Data Sources and Reporting Government of Tuvalu s annual budget documents TTF Advisory Committee's biannual reports Risks Broad reform consensus weakens because of political pressure External shocks requiring CIF drawdown Outputs 1. Public procurement strengthened CIF s target balance of 16% of TTF achieved in 2015 and most likely to be achieved in In addition, the government has committed to growing TTF to A$200 by 2020 million and establishing and growing the TSF. This will make achieving the CIF target more difficult but will add to fiscal sustainability. 1.1 Procurement annual report for 2014 developed by the CPU and approved by Cabinet. (2014 baseline: not applicable; this is the first annual report.) Delays were encountered in finalizing the 2015 report, which was finally approved by the Finance Minister in January The 2016 annual report is under development and will be approved by June Government procurement website developed and launched as a centralized resource for all public procurement-related information. (2014 baseline: not applicable; this is the government s first public procurement website.) Website continues to be utilized along with other measures to increase awareness of international and local bidders of Tuvalu procurement contracts. 1.1 Copy of CPU report certified by Finance Minister; Letter from Clerk to Cabinet confirming that CPU report was approved by Cabinet 1.2 Letter from Finance Minister confirming his approval of the website; copy of webpage certified by Finance Minister; MFED circular announcing the new website and its functions Stakeholders with vested interests interfere with the reform process. Staff changes and workload pressures reduce continuity and quality of reform implementation. Limited capacity in the MFED and Public Enterprise Reform and Monitoring Unit to reform public enterprises and scrutinize financial performance of public enterprises.

19 Appendix 1 13 Program Results Chain Performance Indicators with Targets and Baselines Data Sources and Reporting Risks 2. Commercial orientation for public enterprises and private sector development strengthened Workload of CPU increasing as a result of greater compliance with procurement requirements for major contracts and increased government expenditure. Significant cost savings expected due to the new procedures, of which outputs 1.1 and 1.2 are only a part. 2.1 Cabinet approval of PERP. (2014 baseline: not applicable; This is the first PERP.) 2.2 Cabinet approval of the concession sale of the VLH, survey of VLH land, and preparation of sale and tender documents (2014 baseline: attempt to tender out the management contract for the VLH failed in 2012 due to limited private sector interest; This is the first attempt to sell the VLH.) Concession for operation of the VLH sold to National Provident Fund on 30 November The concession sale is expected to improve the financial return to the government and shift the risks associated with new investments in the VLH. 2.1 Copy of PERP certified by Finance Minister; letter from Clerk to Cabinet confirming that PERP as submitted by MFED was approved by Cabinet 2.2 Letter from Clerk to Cabinet confirming that the concession sale of the VLH was approved by Cabinet; copy of VLH land survey certified by Department of Lands; copy of sale and tender documents certified by Finance Minister 2.3 Cabinet approval of the PWD rationalization strategy to promote contracting out of capital works to the private sector. (2014 baseline: not applicable; no existing rationalization strategy for the PWD) PWD reorientation proving problematic. PWD is using contracted labor but, except for some instances, is still being responsible for material purchase and construction 2.3 Copy of PWD rationalization strategy certified by Finance Minister; letter from Clerk to Cabinet confirming that PWD rationalization strategy as submitted by MFED was approved by Cabinet

20 14 Appendix 1 Program Results Chain 3. Sustainability of the fiscal buffer strengthened Performance Indicators with Targets and Baselines management. Development of private sector construction firms will require a phased approach. 3.1 The revised financial instructions under the Public Finance Act endorsed by Cabinet. (2014 baseline: not applicable; no earlier revisions to Public Finance Act to strengthen CIF rules) Revised financial instructions being adhered to. CIF s target balance of 16% of TTF achieved in 2015 and most likely to be achieved in Whether the target is achieved in future years will depend on various factors, including fishing license revenues achieved, control of government recurrent and capital expenditure, and level of donor assistance. It may also depend on government s priority ranking of (i) maintaining the CIF balance at or above 16% of the TTF; (ii) growing the TTF to $200 million by 2020; and (iii) establishing and growing the TSF. Data Sources and Reporting 3.1 Finance Minister s order on the revised financial instructions signed off by Secretary to the Government; copy of revised financial instructions; letter from Clerk to Cabinet confirming that the revised financial instructions as submitted by MFED were endorsed by Cabinet Risks Key Activities with Milestones Not applicable Inputs ADB: $2,000,000 (grant) Partner Financing Outputs necessary to reach DMF outcome, not administered by ADB, include: Government of Australia: $1.1 million grant (approved May 2016, disbursed June 2016) Government of New Zealand: $0.4 million grant (approved May 2016, disbursed June 2016) World Bank: $1.5 million grant (approved March 2015, disbursed 16 June 2015) ADB = Asian Development Bank, CIF = Consolidated Investment Fund; CPU = central procurement unit; DMF = design and monitoring framework, MFED = Ministry of Finance and Economic Management, PERP = Public Enterprise and Reform Plan, PRM = policy reform matrix, PWD = Public Works Department, TSF = Tuvalu Survival Fund, TTF = Tuvalu Trust Fund, VLH = Vaiaku Lagi Hotel. a Government of Tuvalu. National Strategy for Sustainable Development, Funafuti. Source: Asian Development Bank.